If Megaupload founder Kim Dotcom were really smart, this is where he would be today: a beach somewhere with no extradition treaty. Who keeps their clothes on at the beach anyway?

Yesterday Digital Music News ran a post titled “What Really Killed MegaUpload? MegaBox, That’s What…” promulgating a conspiracy theory essentially claiming that Kim Dotcom’s new music platform so intimidated the record industry that they conspired with the government to shut down a foreign entity, Megaupload, in order to save its own ass. The post stated that Megabox was “being positioned as a major stab at major labels, particularly MegaUpload nemesis Universal Music Group.  ‘They don’t understand that the rip-off days are over,’ Kim Dotcom told Torrentfreak.  ‘Artists are more educated than ever about how they are getting ripped off and how the big labels only look after themselves’.”

The truth, according to a highly placed source who asked to remain anonymous, is that Megabox was most likely not even a dream when this investigation began. Anyone who took the time to actually read the indictment would see that the government clearly states “On or about June 24, 2010, members of the Mega Conspiracy were informed, pursuant to a criminal search warrant from the U.S. District Court for the Eastern District of Virginia, that thirty-nine infringing copies of copyrighted motion pictures were present on their leased servers at Carpathia Hosting, a hosting company headquartered in the Eastern District of Virginia.  A member of the Mega Conspiracy informed several of his co-conspirators at that time that he located the named files using internal searches of their systems.  As of November 18, 2011, more than a year later, thirty-six of the thirty-nine infringing motion pictures were still being stored on the servers controlled by the Mega Conspiracy.”

There it is in black and white. The investigation was about movies and began years ago. So it stands to reason that former senator and current MPAA head Chris Dodd must have been in the Justice Department’s grill about initiating the investigation in the first place, except that Dodd didn’t start at the MPAA until March of 2011. The government subpoena was served nearly nine months prior to Dodd’s appointment and it becomes clear that the investigation had gone on for at least a year prior to the issuing of the subpoena. In light of the government’s investigation, this Megabox “conspiracy theory”  is starting to look more like Paul is dead or the moon landing was faked. Besides, DMN makes the leap of logic that the record industry is smart enough to conspire about anything! They couldn’t agree on where to have lunch let alone figure out how pull off a bust of this magnitude. Come on…we’re talking about record guys here!

Additionally, according to one of my sources, the recording industry knew nothing because “the Justice Department is extremely tight-lipped about its investigations. There’s no way they would discuss it with us. Are you kidding me?”

So how was the US government able to shut down a foreign registered company? Because these idiots kept infringing files on servers in the US, the domain is registered with a US registrar, they used Paypal to transmit monetary rewards to users in the US who uploaded the most popular movies, music, games, books and software, and they were in clear violation of Grokster while doing it!

To further negate this conspiracy theory, the indictment provides excerpts from email communications amongst the Megaupload Conspiracy that reveals various strategies on dealing with the investigation, including moving the company and going legit. “On or about November 1, 2010, (note—this is five months after the criminal search warrant served on Dotcom as noted above) ECHTERNACH forwarded an e-mail from a Universal Music Group (“UMG”) executive to DOTCOM and ORTMANN, which discussed requirements that UMG would require of Megaupload before they could discuss licensing for MegaBox. Included in the list of requirements was “proactive fingerprint filtering to ensure that there is no infringing music content hosted on its service; proactive text filtering for pre-release titles that may not appear in fingerprint databases at an early stage; terminate the accounts of users that repeatedly infringe copyright; limit the number of possible downloads from each file; process right holder take down notices faster and more efficiently”, the indictment reads. In other words, Dotcom’s archenemy Universal Music was willing to talk terms with Megaupload, and speaking from experience, I think UMG was being pretty damned decent. Had I been in Dotcom’s shoes, I would have jumped on that offer. Clearly UMG’s goal is to convert bad actors into legitimate players. More evidence that UMG digital chief  Rob Wells is the most progressive label guy in the business. (note to Lucian Grainge: don’t be a schmuck.Give this guy whatever he wants!)

One has to wonder why Dotcom and company didn’t just pick up their marbles and split once they learned they were under investigation. I sure would have. After all, they had taken in around $175 million in cash, according to the indictment, and could have easily shut down and moved to a nice beach somewhere with no extradition treaty with the US and lived like kings. But Dotcom decided to double-down instead. He just figured that he could tell the US government to fuck off, and anybody who has ever had to deal with the IRS knows that doesn’t work.

To me this is simply a case of a guy having too much money to think straight.

© 2012, Wayne Rosso. All rights reserved.

How to rewrite history with one little press release

The news that NARAS is honoring Steve Jobs with a Trustee Award has been picked up by media outlets worldwide. In making the announcement, the Academy said, “As former CEO and co-founder of Apple, Steve Jobs helped create products and technology that transformed the way we consume music, TV, movies, and books. A creative visionary, Jobs’ innovations such as the iPod and its counterpart, the online iTunes store, revolutionized the industry and how music was distributed and purchased. In 2002 Apple Computer Inc. was a recipient of a Technical GRAMMY Award for contributions of outstanding technical significance to the recording field. The company continues to lead the way with new technology and in-demand products such as the iPhone and iPad.”

All true, but disingenuous at best. I find it to be just another cynical public relations stunt by an industry seeped in hypocrisy.

Let’s look at the facts. Does anyone remember how Steve Jobs had to drag the labels into iTunes kicking and screaming? Prior to iTunes, Sony Music septuagenarian CEO Doug Morris, then CEO of Universal Music, called iPods “repositories for stolen music”. He later went to war with Jobs, enlisting Sony and Warner’s help, whining that the industry had been “rolled like a bunch of puppies” with the iTunes terms. They complained about the $.99 price point. They complained that Jobs had too much control. Artists and managers started to line up behind Morris’ ill-fated jihad. Irving Azoff (Eagles, Journey, Christina Aguilera, and others) told Businessweek ”Doug is doing the right thing taking on Steve Jobs. The artists are behind him.”

As the digital age has matured, labels have bent over backward to protect their iTunes revenues while simultaneously chafing under the strong arm of Apple. They called Jobs “pigheaded” and Machiavellian. Once the industry woke up to Apple’s business model, they cried like babies over not getting a cut of iPod sales. Genius Doug Morris got everyone together to teach Jobs a lesson and start their own digital initiative, Total Music (not exactly a household brand name today). They hated Steve Jobs.

Sure Steve Jobs was a genius. I read the book. I’m a big Apple fan and have been for many years. But Jobs didn’t invent anything. Digital music services existed before iTunes. So did MP3 players. Jobs’ talent was in making these, and other, products so much better. He didn’t invent the mobile phone but the iPhone is now the gold standard. Same with computers, tablets and soon TV’s.

Several years ago Apple was awarded a technical Grammy, and it was certainly deserved. Apple computers and software have become integral components in the recording process. The Trustees Award is given to those who have significant contributions to the field of recording in areas other than performance. So did Steve Jobs produce, engineer,compose or arrange music like his co-honorees Dave Bartholomew and Rudy Van Gelder?

If the Academy wanted to honor the actual pioneers of digital music they’d be giving an award to Michael Robertson or Diamond, the manufacturers of the first portable mp3 player. The industry chose to sue them at the time. Michael Robertson was the guy who popularized the MP3 format and was even the first to launch music in the cloud. But Michael isn’t dead yet and the industry enjoys suing him too much to give him credit for anything.

The NARAS press release was picked up everywhere and got lots of play. The lead in every story was about Steve Jobs getting a “special Grammy”. A special honor for the guy that every label hated. An award for the guy who held the industry in a stranglehold for years. A man they  all cursed and whined about. So do you think that this is just a big publicity gimmick?

Now that Steve Jobs is gone, they seem to have changed their tune.

© 2011, Wayne Rosso. All rights reserved.

Back to the future? With the new app from legendary AIR Studios your iPad can now play vinyl! Pretty cool.

The resurgence of vinyl records has been a small but growing bright spot for the music industry in the last few years. Whoever thought that kids would be schlepping around crates of LP’s in the 21st century, decades after the onslaught of the CD? The old analog sound has gained so many new devotees that Universal went so far as to create it’s own online store, Groovetown, devoted to vinyl. Many independent online retailers like MusicDirect, MusicStack, Buy Vinyl Records, Vintage Vinyl, even Best Buy and Amazon have started merchandising new and used vinyl LP’s. Mom and pop record shops across the country have seen as much as 30% of their business come from new and used vinyl. To paraphrase Mark Twain, history doesn’t repeat itself but it rhymes.

Digital sound has been criticized as being cold and antiseptic, but now studio engineers from the legendary AIR Studios, founded by Sir George Martin, have found a way to take digital sound back to the future. With the help of UK app developer Bappz, AIR Studios has created AirVinyl, an iPad app that recreates the warm, harmonious depth of sound that is found on vinyl records for digital media files when played through the iPad. The app is also AirPlay enabled and will soon include its own clever feature – AirStreem, which also allows users to stream music from their Mac to AirVinyl over wi-fi. It’s available today at the iTunes App store for a limited time for $.99.

The AirVinyl app is an exciting new twist for digital music afficionados and audiophiles, but it could also serve as a platform for even bigger projects like an Air Studios digital record label. AirVinyl could also be easily integrated with new streaming music services like Spotify to bring the analog listening experience to the cloud, Facebook, or even the FLAC store that is part of UMG’s Groovetown.

The app goes on sale Monday morning and is fun, creative and beautifully crafted. Plus the sound is amazing. You’ll think that you’re back in your room at home sneaking a joint and listening to Hendrix blast on your stereo before your parents come home and bum you out. Bappz, the creators of the wildly popular London Tube Map app, did a terrific job by lovingly recreating the physical act of LP listening. Bappz was founded by former record producer Paul Myers, a high profile London internet entrepreneur who created Britain’s first free ISP, X-Stream, and Wippit, once the biggest UK-based MP3 online music and movies store. Myers has just the right experience and sensibilities that Air needed to bring an invisible under-the-hood technology to life in AirVinyl and it really shows.

Users can select their music from Crates, browsing by flicking through the covers. Playlists are accessed as Mixtapes, using the familiar analog interface of the cassette deck, but fortunately without recreating that nasty cassette sound. This app is REALLY cool and supposedly will be available soon for iPhone. More skins and features will be added soon. My guess is that they’ll eventually put out an Android version but I’d love to see a desktop version that would essentially turn your computer into a virtual analog turntable.

I know you’re not used to me saying nice things, and I certainly rarely review stuff, but it is Christmas time and I’m feeling it. But not for long, I’m sure.

Get AirVinyl at http://bappz.com/airvinyl

http://itunes.apple.com/gb/app/airvinyl/id482570332 for the UK

http://itunes.apple.com/us/app/airvinyl/id482570332 for the US.

© 2011, Wayne Rosso. All rights reserved.

"Not a problem. I can can make it work."

The last time we heard from our friends at doomed free music service Qtrax was last March when they launched for the fourth time in about as many years. The service launched with only subdued support from the major labels: EMI said that they had signed a “short term agreement”; Sony and Universal did not comment at all; Warner said they did not license their content to Qtrax. Since its dubious March re-launch, absolutely no new music has been added to the catalog. All tracks are tethered to the computer and wrapped in the obsolete Windows Media DRM requiring the Microsoft Silverlight media player for playback. CEO Allan Klepfisz promised a mobile client within weeks of the launch, but that has yet to materialize. Qtrax launched in 12 countries (Argentina, Australia, Canada, Chile, Colombia, Dominican Republic, Fiji, Malaysia, Mexico, New Zealand, Singapore, US), but as of last week the site only had 730 daily visitors and 730 daily page views, according to Wolfram Alpha. Sounds like their entire user base is in Fiji.

At the time of the launch, Billboard wrote:

But maybe it’s too late — for the U.S. market, at least. The Qtrax model, which placed an emphasis on downloading, now seems better suited for an earlier age. In January 2008, consumers were more firmly rooted in downloads. The iPhone had been out for only about seven months. Vevo didn’t yet exist. Lady Gaga, who now has over 1 billion YouTube streams, had net yet released her first album.

Since then, consumers have started to shift away from downloads and toward the cloud. So have investors. The major venture capital dollars have flowed into cloud-based services that emphasize streaming and caching, not downloading.

Most worrisome is the product itself, the preview version, a confusing experience to anyone weaned on more user-friendly music products like iTunes, Rhapsody or, well, anything else but this. Finding and listening to music on Qtrax is a cumbersome experience that seems out of place in a market filled with many slick, feature-rich, multi-platform services. If the hype over Spotify teaches us anything, it’s that a music service needs to be an incredibly well designed product. Clutter doesn’t work.

Everyone remembers the million-dollar egg that Qtrax laid at their MIDEM launch in January of 2008. At that time Klepfisz announced to the world press that he had deals with all of the major labels only to have every major label issue denials the very next day. Since then the media has paid little attention to the company, its credibility having been completely obliterated.

But that didn’t stop our man Klepfisz.

Even though he has not filed any reports with the SEC in years, or held a shareholders meeting, he marched to China. In October of 2009 he announced a huge search deal with Baidu and an impending China and Pacific Rim rollout that would commence that month and extend through the end of 2009. Didn’t happen.

One of his problems was money. After having been sued by numerous investors and vendors, including the IT consultants he hired for his MIDEM launch, Klepfisz was hit with the mother of all lawsuits–he bounced a $1.8 check to Oracle. Klepfisz said that it was nothing but “a little tiff”. He ignored the suit, and when Oracle moved for a default judgment, he hired an attorney to make the classic “the dog ate my homework” defense to the judge. The strategy slowed down the process for a couple of years, but ultimately did not work. Three weeks ago a federal judge in Oakland, CA granted Oracle a judgment for $1.8 million plus interest, bringing the total to a little over $2 million. Additionally, the court ordered that Qtrax had to return all copies of Oracle software in their control or possession.

Good news for Oracle, right? Not really. John Fife, a Chicago investor, sued Klepfisz for $1.3 million, got a judgment, and apparently worked out an arrangement with Klepfisz, only for the embattled CEO to renege. So Fife brought a motion for contempt of court and in the process a New York state judge froze all of Klepfisz’s personal assets, ordering him to appear in court within 30 days to testify upon penalty of incarceration. So I guess Oracle is going to have a hard time  getting the bank to cash that settlement check…again.

But let’s not stop there. Last week four private investors in Flushing, NY sued Klepfisz for an aggregate of $250,00 plus interest and attorney fees. According to the filings, Klepfisz borrowed the money  in May of 2009 at an interest rate of 9% per year. (filing 1, filing 2, filing 3, filing 4) Obviously he decided he didn’t have to pay them back and of course he can’t get to his funds in order to hire a lawyer to defend the suits, even though he typically just doesn’t show up in court and takes a default judgment . He clearly knows how to game the system.

You’d figure that after over eight years and more than a reported $50 million there’d be more than 730 users and millions in judgments. This guy is sued more often than GM! So where did all the money go? Certainly not to the labels, they’ve kept him on the shortest of leashes. It sure isn’t in the technology or web site. Maybe he borrows money to settle lawsuits, then gets sued for not repaying those loans? Nah. Klepfisz does have a reputation for enjoying 5 star hotels and Singapore Airlines first class compartments. We’ll probably never know where all the money went. But I bet that Bernie Madoff could figure the whole thing out.

© 2011, Wayne Rosso. All rights reserved.

 

The iPod: A license to print money

(Or How Doug Morris Gave Away The Record Industry)

Walter Isaacson’s terrific biography of Steve Jobs is full of interesting little gems. Of interest to most of my readers is, of course, the section dealing with iTunes and Jobs’ negotiations with the record industry.

As Isaacson describes it, Jobs launched a massive charm assault to win over the heads of the major labels. He started with Roger Ames, then of Warner Music, and quickly moved on to Doug Morris, then CEO of Universal Music. The two execs quickly fell under Jobs’ spell, impressed with the iTunes end to end solution.

After dazzling these two knuckleheads, Jobs ran into a road bump in the person of Andy Lack, then the new CEO of Sony Music. Andy learned from the great Jack Welch who taught him “not to fall in love”. Andy is a smart, affable, good humored guy, but Jobs thought he “could be a dick”. And why is that? Because Andy saw through Jobs’ modus operandi and realized, unlike Morris and Ames, that by licensing their music to Apple, they would drive the sale of millions of iPods which in turn would drive the sales of millions of Macs. And that’s exactly what happened. Like Gillette with razor blades and Hewlett Packard with printer ink, the music industry’s content would sell a whole bunch of hardware. While the other guys had stars in their eyes, Andy connected the dots and pushed Jobs for a royalty on the sale of each iPod.

I remember during that time I was talking to a very high level executive at one of those labels (still in the same position today, in fact) who told me there was “no way I am going to let Andy Lack be the savior of the record industry”. Jobs, Morris and Ames made sure of that. Morris and Ames refused to go along with Lack’s strategy to get a royalty from ipod sales and thus isolated him in the industry. As a result, Morris and Ames gave Steve Jobs and Apple the keys to the shop and there’s been no turning back. Apple, in effect, controls the music industry today.

A couple of years later Morris woke up from his coma, demanded and got a one dollar royalty from Microsoft for the sale of every Zune music player. Good call, Doug. You were right on top of that one. He probably made Universal Music an extra $276 on that deal.

The music industry hates outsiders, and they considered Andy Lack an outsider just like Eric Nicoli, Jim Fifield, Elio Leoni- Sceti and Guy Hands. But unlike those guys, Andy was a genuine media mogul. He may not have come from the music industry but he is very savvy and understood how major media companies run and the value of their content. I remember when Andy was catching a lot of grief about giving Bruce Springsteen a big check for re-signing with Sony, especially from the BMG half of Sony BMG. He said “If they’re pissed off about how much I’m giving Springsteen to stay here, how pissed do you think they’ll be if he signs with Universal instead?” Good point. Springsteen renewed with Sony and it’s not been talked about since.

Andy Lack is a decent man. He was always fair and honest in his dealings with me and I always appreciated that. He never went back on his word. Steve Jobs didn’t like the fact that Lack was doing what was right for Sony and the music industry. If Doug Morris had been smart enough to take Andy Lack seriously the record industry would not be in the anemic state that it’s in today. The Steve Jobs book proves that Andy Lack was right all along.

So what happens? Andy Lack now heads new media for Bloomberg and Sony ends up hiring bedazzled septuagenarian Doug Morris in Andy’s old job. These guys will never learn. No wonder Lucien Grainge is thrilled he’s at Sony.

© 2011, Wayne Rosso. All rights reserved.

The latest rumor is that the “twist” may actually be a limited form of music sharing.

According to a digital media source, “it will probably be limited to a small number of plays”, but the source was unfamiliar with any details.

This is somewhat believable given Wednesday’s introduction of Ice Cream Sandwich, the new Android operating system, which debuts a new feature called Android Beam. According to the Google Nexus web site, with Android Beam “you can now easily share contacts, websites, apps, maps, directions and YouTube videos to other people close by. Simply hold two NFC enabled Android phones close to each other and touch to beam and share.” Could music tracks be included in this? Why not?

Also, Google+ is very tightly integrated into Ice Scream Sandwich thus opening the possibility of some form of music sharing on the social networking platform.

The integration of Google+, a Google Music Store, Google Music Beta and Android could very well catapult the search giant into a pivotal power position in the music business.

According to Rubin, “Google is in the very, very early phases of adding consumer products to our portfolio. The media industry didn’t see us as that. They saw us a search company.”

Speaking of consumer products, Best Buy’s sale of Napster to Rhapsody marks the retail behemoth’s second failure in digital music. The first was in 2003 with the MusicNow download store, powered by the now defunct FullAudio, Inc.

Having not learned their lesson, Best Buy is dipping its toe into the water yet a third time with their own cloud music service appropriately dubbed Music Cloud, powered by CatchMedia. There are two tiers of Music Cloud service, Lite and Premium. The former is free, while the latter costs $3.99 a month. But here’s the catch: the Lite version only lets you listen to the first 30 seconds of each song — you gotta put out for the Premium service if you want your tunes to go. The service is about to fully launch, having been in beta all summer with mixed results.

So why can’t Best Buy, with all of its retail clout, make a digital music service work, even one with brand identity? According to a highly placed digital media consultant who has worked with Best Buy in the past, “Half of the year they’re getting ready for the holiday season and the other half they’re analyzing the holiday season sales results. They just never lift their heads to pay any attention to much of anything else. Consequently it’s extremely difficult to get their attention.”

It feels like the third time may not be the charm for Best Buy. At least the boys at the home office can go ice fishing during their lunch breaks.

UPDATE: Cnet’s Greg Sandoval has terrific Google sources and has more details in his recent post. Check it out. It’s a good read.

© 2011, Wayne Rosso. All rights reserved.

Sean Parker--investor, entrepreneur and professional party planner

Industry sources tell me that Sean Parker is working furiously behind the scenes with Ron Burkle’s Yucaipa Companies to put together a winning bid for EMI. According to insiders, Parker really wants this to happen. The main competition seems to be Junior Bronfman, who’s new duties at Warner Music seem to consist solely of trying to outbid everyone else for EMI.

Since Junior has been shown the door, the new CEO Stephen Cooper has been wisely keeping his head down and staying under the radar. Maybe he realizes that the music industry doesn’t take kindly to outsiders and by staying down in his foxhole Lyor is more than willing to keep popping his head up and drawing fire. I mean really…there’s just nothing like a record executive’s ego. By keeping a low profile, Cooper can just do what he has to do and let Lyor take the media heat.

It would be very surprising for Junior to pull off the EMI deal even if he did place the winning bid. I still believe that a Warner/EMI merger would never get through EU regulators. Certainly EMI CEO Roger Faxon would prefer having a buyer who is not in the music industry, but would he really want Sean Parker as his boss?

There’s no doubt that if he won the deal, Parker would not be a passive investor. Far from it. As he displayed last week, he’s taken a very active role with Spotify. There’s no doubt that Spotify will be the biggest winner of all the competing services on the new Facebook platform, having acquired nearly a million new users in less than the week since the Facebook integration. He lives large and likes to put his fingerprints on everything he’s involved with, but as one Parker associate told me, “Sean’s just got too much money”. Others say that it would take a real stretch of the imagination for Faxon to live with answering to Sean Parker, who is at least 30 years his junior. Sounds like Sean and Roger could be on a quick collision course.

Unless, of course, Burkle, the older wiser wing man for Bill Clinton, can keep Sean under control. We do know that Parker would at the very least revive an old music industry tradition. He likes to throw a lot of big expensive parties. Woohoo!

© 2011, Wayne Rosso. All rights reserved.

Justice, and licensing, is expensive.

Lawyers for EMI are confident that they will prevail in their lawsuit against Michael Robertson’s MP3Tunes, according to well-informed sources. The label also believes that they will get a ruling on the case fairly soon, though Robertson has heard nothing indicating an imminent decision from the courts.

A reason for this optimism on the part of EMI is unknown at the moment, but if a ruling either way were to come down soon the timing could prove to be extremely awkward.

As everyone knows by now, both Amazon and Google have abandoned the licensing process in favor of the music locker model almost exactly like MP3Tunes. However sources say that both companies are currently engaged in licensing discussions with the major labels.

If a ruling should come down, say by the end of summer, who would have the leverage, Google and Amazon or the labels? Clearly a win for MP3Tunes would definitely give Google and Amazon great leverage and also give a lot of breathing room to services like M Spot.

Obviously a win for EMI would be bad for the MP3Tunes and M Spots of the world, but not necessarily for the big boys. The labels would use any perceived leverage to pry more up front cash from Google and Amazon, but they certainly would be foolish to sue and I doubt that they ever would.

Should MP3Tunes win Google and Amazon’s hand gets stronger, but it’s really all about the money and the legal outcome of the MP3Tunes case will basically dictate how much these big players will pay to get into business with the major labels.

Then again there’s a third possible, and probable, outcome no matter which way the ruling comes down—an appeal. This, of course, would draw out the process and in the meantime not really have a lot of impact on either side in the licensing negotiations between Google, Amazon and the labels.

As I said earlier, it all comes down to the money. Throw enough cash in front of a record label and it’s surprising how cooperative it can be. The 1 to 2 years that it takes to close a licensing deal can suddenly be done in 2 weeks, and that kind of cooperation really costs.

© 2011, Wayne Rosso. All rights reserved.

Why is this man smiling? Warner Music board member Shelby Bonnie

A member of the Warner Music Group board of directors is about to become embroiled in a copyright infringement lawsuit against CNET and its owners CBS Interactive that could be extremely embarrassing for the music company and bring unwanted attention to the pending sale of WMG to investor Len Blavatnik.

Plaintiffs in the copyright infringement lawsuit Alki David v. CSB Interactive have pointed out that Shelby W. Bonnie held seats simultaneously on the boards of both CNET and Warner Music for two years. During this time Warner CEO Junior Bronfman was suing Limewire for copyright infringement and very publicly complaining about the huge monetary damage it had inflicted upon his company while at the same time having a sitting board member who was also serving as a director of the biggest distributor of Limewire software, more than 220 million copies in fact.

Bonnie, CEO of Whiskey Media, LLC, is also the founder, former CEO (March 2000 to October 2006) and Chairman of the Board of CNET. Bonnie resigned as CEO in 2006 under a cloud of suspicion involving the backdating of stock options, though he continued to serve as a director of CNET Networks until March 2007. Oddly, just last week the New York Post ran a story detailing how the Warner Music board lowered the vesting price for 1.6 million of Junior’s restricted shares the day before the announcement was made that WMG was up for sale, thus sending the stock price up 27% resulting in an additional $13.6 million for the prodigal Seagram son. Great timing.

During his tenure with CNET, Download.com, a CNET site, was the primary distributor of peer-to-peer software and profited greatly from file sharing’s popularity. On June 27, 2005, while Bonnie was still CEO of CNET, the US Supreme Court issued its decision in the MGM v. Grokster case, which laid out very strict guidelines for the marketing and distribution of p2p software with intent to infringe upon copyrighted material.

In November of 2005, just 4 months after the Grokster decision, Bonnie accepted an invitation to sit on the board of directors of the Warner Music Group, a position he still holds that carries an annual compensation of $160,000 per year, and is considered to be a reliable ally of Junior Bronfman. So for at least 2 years Shelby Bonnie was a director of both CNET and Warner Music Group, one company distributing over 95% of Limewire’s software (and over 98% of Kazaa’s software), enabling the theft of millions of dollars worth of the other company’s copyrights. Warner Music, of course, was a plaintiff in both the Limewire and Grokster cases. WMG CEO Junior Bronfman recently testified in the Limewire trial as to the extent of his company’s damages saying that LimeWire had a “devastating impact” on the industry.

The Blavatnik Boys (left to right) Larry, Moe and Curly

Warner Music was also a plaintiff and financial beneficiary in the thousands of lawsuits filed by the RIAA against private individuals for illegally downloading their music using Limewire (and other) software obtained directly from CNET.

The lawsuit, brought in May by billionaire entrepreneur Alki David, claims that artistic works of his and his co-plaintiffs were infringed upon because CNET distributed Limewire file-sharing software (among others) and was willfully encouraging and profiting from the distribution of p2p software that was used for illegal purposes. Not to mention the distribution of DRM-stripping software, which is a direct violation of the DMCA. The suit is clearly an attempt to widen the Grokster decision.

Alki David has accused CBS of hypocrisy. His theory is that because CBS owns CNET—which was the main distributor of the Limewire file-sharing software—CBS has made a major contribution to online piracy. (Limewire’s software has now been banned and the service was shut down by a court injunction). “The CBS Defendants’ business model has been so dependent upon P2P and file-sharing that entire pages of Download.com are designed to specifically list and categorize these software offerings,” says the complaint. “In fact, the CBS Defendants’ were well aware that these software applications were used overwhelmingly to infringe when they
 first partnered with LimeWire and other P2P providers, but ignored it in exchange for a steady stream of income.”

While David originally floated the idea of a class-action lawsuit against CBS, his current suit has several named plaintiffs but is not seeking class-action status. That is about to change.

Billionaire plaintiff Alki David

According to David, he is about to add thousands more copyrights to his lawsuit, having found many ebook publishers willing to sign on. He is actively seeking more plaintiffs and then attempt to have the suit classified as a class action. To that end, he has set up a web site where copyright owners who feel that their property has been infringed upon can register to join the lawsuit. The site also features a long video staring Alki David himself explaining the ins and outs of the action and offering solid evidence against CNET, including Cnet broadcasts featuring some of their reviewers and editors explaining how to use certain p2p software to download copyrighted recordings and films. David went on to tell me that he hopes to soon have over 10,000 copyrights added to the complaint.

In the meantime Shelby Bonnie finds himself in a somewhat awkward position and may have, in the words of Ricky Ricardo, “a lot of splainin to do”. At the very least it gives the appearance of shadiness, and let’s face it, Junior Bronfman is no stranger to corporate shenanigans, having been convicted by a French court earlier this year for insider trading of Vivendi stock. Bonnie is sort of like the spoiled son who gives a burglar the keys to rob his rich Dad’s mansion and then splits the haul with the thief. If you close your eyes real tight you can almost hear Claude Rains inhabiting Shelby Bonnie’s body saying “I’m shocked, shocked to find that gambling is going on in here.” No wonder Junior keeps getting all of those terrific performance bonuses.

David’s attorneys will surely depose Bonnie during the discovery process and several lawyers I spoke with said they had always wondered why the recording industry never went after Cnet in the aftermath of the Grokster ruling. Many legal experts I spoke with feel that the suit will be a tough sell, but who knows how many lawsuits could be born from this if Alki David prevails in his claims against CNET. As one attorney told me, “This is a great country. Anybody can sue anybody for anything.”

However CNET, which was acquired by CBS for $1.8 billion in cash in March of 2008, continues to distribute file-sharing software like “son of Limewire”, Frostwire, which was created by a small band of former Limewire software engineers.

Sources say that the Warner Music people have been very nervous that someone would publicly connect the dots of the Shelby Bonnie situation and bring them a great deal of agita.

Break out the Rolaids kids.

© 2011, Wayne Rosso. All rights reserved.